Video Transcript Below

Opening and housekeeping

00:00:00

Francisco Sirvent: Good morning, everybody. We will be starting in a few minutes. I have everyone’s microphone muted so we do not get feedback on anyone else’s end and you can hear clearly. Get comfy, grab a snack, grab a drink. We will get started right at noon. Welcome, everybody. Good to see you all.

For those of you who know me, you know me. For those I have not met before, my name is Francisco Sirvent. I am the owner of Keystone Law Firm and Lifestyle Planning, an estate planning attorney and financial adviser. I have been helping people since 2007 with this stuff. We are going to spend a little time today going over what I think are some important things to know about protecting yourself from lawsuits and similar risks. That is our focus today.

Before I jump in, a couple of quick things. This is being recorded, and we will share the recording on our YouTube channel.

Questions and participation

00:14:22

Francisco Sirvent: If you have questions today, I welcome them. I will have time to open the mics and the chat for questions, and I am happy to answer them right here, right now. Just remember this is being recorded and will be shared on our YouTube channel for anyone to watch. If you ask a question, keep it generic and hypothetical so you do not reveal more than you want to share. You can usually phrase it in a generic way.

If you missed any of our webinars this year, please go to our YouTube channel and check them out. They are all there. It is easy to find. Search for Keystone Law Firm on YouTube. One of our playlists contains these longer form webinars, so you can watch them directly and watch them again if you like.

00:15:18

Francisco Sirvent: You can learn as much as you want. You are welcome to share them if a topic comes up with a friend or a family member and you think, “This might apply to you.” These webinars are open to the public. Some of you are clients, some are not, and some have never met us. If you look at our invitations for upcoming webinars and you see something relevant for a friend or a colleague, feel free to pass it along. These are not exclusive or limited. We have plenty of bandwidth to add people.

You can drop questions in the chat any time you want. I will do my best to catch them as I go, and if I do not, we will have time before we finish to cover those questions.

00:16:10

Francisco Sirvent: Before we finish today, I will point you to the topic for next time on October 24. I will invite you to that one. It is a little different, and I will tell you more as we get to it.

Today is focused on a small slice of a big topic. I am going to go as deep as I can in about 40 minutes to help frame what can otherwise feel like a big, complicated cobweb of information. I hope to organize it in a way that helps someone who owns rental property or has wealth in brokerage accounts, investments, or businesses figure out which pieces make sense and how they might apply to you, your situation, and your family. Obviously, not all of it will apply to all of you, but I hope each of you will walk away with one or two nuggets and think, “That was helpful. Now I get why I need to learn more about this piece or that piece.” That is my goal.

Today’s focus and mindset

00:17:23

Francisco Sirvent: The topic is the next level of asset protection when you are thinking about protecting your stuff. We all either are, like me, in our working years, or you are in retirement and you worked hard your whole life to save and invest and grow a nest egg. You want that to take care of you. You want that to be your safety net. Maybe you want to pass some of it to the next generation. The last thing any of us want is a lawsuit that ends up devastating what we worked so hard to accumulate.

I saw a post this morning that was gut wrenching. The person said they had been doing what you are supposed to do: putting money in every month, saving and investing with discipline, only to wake up one morning after years of that and feel like they were back to square one. It is hard to make up the time it takes to build this. So protecting what you have built is something we all need to know more about. We get lots of questions about this. We talk about it with many of our clients in one form or another. I hope this gives you a good overview of the different ways you can protect yourself from those big, ugly, devastating losses. I will take this a bite at a time, because I do not know everyone’s starting point. I will start with a quick overview and then go into more details.

00:19:42

Francisco Sirvent: I am a visual learner and a visual teacher, so I like to draw as we go.

The first thing to know about asset protection is that it is not a one size fits all approach. No good asset protection lawyer should tell you something is bulletproof. No matter what legal structure you put in place, if you do not operate and manage it over time with the specific formalities that are required, it may not provide the protection you expect. I am going to talk about how that works and how it can play out.

Asset protection should be approached with the mindset that if you get sued, you want to end up with as much of what you originally had as possible. If you have this much when you get sued, you want to end up with all of it or as much as possible when the lawsuit is done. The goal is not to say, “I can do whatever I want and beat any lawsuit. I am untouchable.” That is not the mindset of a mature person thinking about asset protection. The mindset is, “I want to keep my stuff. I want to keep my nest egg. I want to keep my financial security. I want to keep what I have to pass on.”

The usual starting point

00:21:23

Francisco Sirvent: Here is the typical starting point. A lot of people who are not doing any asset protection are living their lives and collecting investments, savings, rental properties, or businesses. They continue to add and add. That is how you build wealth. At some point you do a personal balance sheet and realize, “I have a few million dollars. If I add up everything, I have some wealth.”

Often it is scattered around your life in many places and pieces. It has not yet been organized in a way that would protect you from a lawsuit. That is when people come to us and say, “What do I do now? I want to keep what I have, I do not want to lose it, and I do not want to give up control of everything because this is my life and my money.” That is how it starts. Your stuff is spread around, and it works because you are making money, your money is making money, and it provides the lifestyle you want.

00:23:43

Francisco Sirvent: But now you may start to look like a target, like someone with deep pockets. When that happens you become a risk, because lawyers know they can file a lawsuit, even a weak one, just to extract a settlement. You want to avoid even looking like a target.

Revocable trust myths and first steps

00:24:55

Francisco Sirvent: Many people first set up a revocable living trust. There are a lot of myths and misconceptions about it. A revocable living trust does not protect your assets from lawsuits or creditors. It is to organize your affairs if you become incapacitated or pass away. That is often the first step people take, but it does not protect against creditors.

What do people do next? Often they put rental properties into an LLC. That is a great step. We typically recommend that if you own multiple pieces of rental real estate, you put each one into its own LLC. You form a new one for each property and make the LLC the owner. Here is why I like that.

00:26:22

Francisco Sirvent: This brings up the concept of containing liability. I refer to this as inside out and outside in. If something happens on your rental property and the tenant sues the landlord, if the property is in an LLC, the LLC is the landlord, not you. That LLC is legally a separate person from you.

00:27:39

Francisco Sirvent: They can only sue the LLC. If you have each property in its own separate LLC, they cannot sue your other entities. That is inside out protection. Whatever liability is inside that LLC cannot get out. A lawyer might try to sue you individually or your other entities, but in your defense you work to get yourself and those other entities dismissed. Even if there is a judgment because of some mistake, it stays inside that one LLC. At worst, you might lose that one piece of property.

Now think about the other direction.

00:29:04

Francisco Sirvent: You are going about life and you cause a big car accident on a personal errand. The other driver is injured and sues you individually. We have insurance, which I will cover in a second. From the inside out and outside in perspective, if they get a judgment against you personally, they cannot sue your LLCs. Those are separate entities. If they get a one million dollar judgment against you personally, how do they collect? They go after your personal assets. That is where the first layer of asset protection comes in.

Layers of protection

00:30:20

Francisco Sirvent: First layer: exempt assets. Arizona, like every state, has clearly defined lists of assets that are exempt from creditors, including judgment creditors. Even if you lose a lawsuit, these exempt assets cannot be taken. It is Arizona policy to protect certain things. You do not have to file a declaration to use these exemptions. They are exempt by law.

00:31:52

Francisco Sirvent: Examples: Arizona’s homestead exemption is four hundred twenty five thousand dollars. You only get to pick one home as your primary residence. Four hundred twenty five thousand dollars of equity in that home is exempt from creditors. If you have more equity, they can get to the additional equity. There are also exemptions for household belongings, a wedding ring, one motor vehicle up to a certain value, tools and equipment related to a job, and even horses, milk cows, and poultry up to a dollar limit. These are examples of exempt property, and you do not have to declare them.

Two more in Arizona are powerful. One is retirement accounts. If you have an IRA or a 401k, Arizona exempts those as long as you do not take a distribution. Required minimum distributions are not exempt, but the account is. The other is the cash value of life insurance policies. If it has been in place for two years, the cash value is exempt from creditors. Those are the exempt assets.

00:33:10

Francisco Sirvent: Second layer: insurance. Before you worry about LLCs and other structures, make sure you are properly insured.

Insurance companies, if it is a covered loss, will pay for your lawyer to defend you. None of us wants to pay out of pocket to defend ourselves when we are in the right. Your insurance company pays for that defense.

Also, if you get sued and it is a covered loss within policy limits, your insurer will try to negotiate a settlement that they pay, and you walk away with your assets intact. That is why the second layer is insurance: home, auto, professional coverage if you are in a profession, business coverage, an umbrella policy. If you own rental properties, get landlord insurance. All of these stack up so that if you do get sued, you can resolve it with minimal out of pocket expense and keep your assets.

00:35:37

Francisco Sirvent: Third layer: LLCs and certain irrevocable trusts. I will go over those.

Fourth: looking at other states such as Nevada, Delaware, Wyoming, and South Dakota. You might use their LLC laws, limited partnership laws, or trust laws, because some states offer different levels of protection, different court systems, or different tax treatment. At this level you compare which jurisdiction is most advantageous to protect your assets.

Fifth: offshore plans and entities. Think Cayman Islands, Cook Islands, and some other jurisdictions that are attracting offshore planning. These are sophisticated, complex, and expensive, and you give up a lot of control to get the benefits at that level.

These are layers you add one at a time. You typically do not skip from one to five or two to four. As you move up, things get more complex and expensive, and you give up more control. You progress layer by layer.

Why layering matters

00:38:17

Francisco Sirvent: Layering matters because of how plaintiff lawyers evaluate cases. They evaluate two things. First, how hard it will be to prove liability. Second, how hard it will be to collect a judgment.

00:39:41

Francisco Sirvent: Even if liability is easy, if the other side has no way to pay, lawyers will not take the case. They will not put in years of work to get a ten million dollar judgment if there is no way to collect it. They also look for collectability by searching records and databases to figure out what the defendant owns and how much money they have. If it looks like you own only one thing and they cannot see much else, it can discourage lawyers from taking the case.

While you cannot use these layers to completely hide and go fully anonymous, you can make it harder to find what you own. That is an important strategy. You do not want to look like you have deep pockets. You want to look like a normal person next door. If you create that impression, lawyers may evaluate the case and think, “I do not know if I can collect. This looks too hard,” and they pass. If enough lawyers decline, you have used the layers to your advantage.

So start with layering: confirm your exempt assets, make sure you have insurance, and then add the layers you need on top of that.

Q and A round one

00:40:57

Francisco Sirvent: I see a couple of questions. Let me pause and grab those.

Question: Can you put property in an LLC if it has a mortgage?

00:42:00

Francisco Sirvent: Great question. Many properties have mortgages. Most mortgages have a due on sale clause that says if you sell the property you must pay the full balance. When a property goes through escrow, the old mortgage is paid off and the new buyer takes title.

If you own a rental property with a mortgage and you want to put it into an LLC, typically you bought it with a mortgage that is recorded at the recorder’s office, and title is also recorded in your name. Most mortgage companies do not continuously monitor the recorder’s office for changes in title. If you change title from you to you and your spouse, they will not see that or trigger anything, and as long as the mortgage is paid, nothing happens. If you deed it into an LLC, generally nothing happens either.

Under many due on sale clauses, a transfer into an LLC could be construed as a transfer that triggers the clause. The mortgage company would have to step up and say, “We see you transferred the real estate into an LLC. You have thirty days to pay off the mortgage, or cure this issue.” It is easy to cure: transfer it back into your individual name and it is done.

Between our office and other attorneys I know in Arizona who do this work, which probably encompasses tens of thousands of LLCs and moves of rental property titles from individuals into their LLCs, we have yet to hear of a mortgage company that actually triggered a due on sale clause in that scenario. We feel the risk is low. With that caveat, we still recommend doing it, understanding it could technically trigger the clause.

00:44:36

Question: Do you put the LLC inside your revocable living trust?

Francisco Sirvent: Yes, and I will show you that in a moment when I describe the structure.

Question: Can lawyers find out how much you have in bank accounts?

Francisco Sirvent: They can if they have a judgment against you. After you lose a lawsuit and a judgment is entered, collection proceedings can require another court hearing where you are put under oath and asked to itemize your assets and entities. In Arizona, lying under oath carries a perjury penalty, and there are cases where people were jailed until they disclosed their assets. So yes, they can find out in that phase.

Basic structure and funding the trust

00:45:45

Francisco Sirvent: Structure, and returning to the question about putting your LLC in your trust. The typical first structure is to set up your revocable living trust and make sure you fund it with everything: bank accounts, investments, LLCs, your business, vehicles, and other assets. Make your trust the owner of everything.

00:46:54

Under your revocable living trust you will have your bank accounts for bills, savings, brokerage accounts, any stocks, LLCs, cars, personal property, gold, and silver. All of it is owned under the name of your trust.

Here is the next level today. In this structure, the inside out issue still applies. If your LLC has a judgment against it, and this is all done correctly, the liability cannot get out of the LLC. If the judgment is for one million dollars but the rental property is worth five hundred thousand, they may force a sale, and your LLC may declare bankruptcy. The rest does not come out of the LLC to your other assets.

00:48:19

What happens if you have multiple properties and multiple businesses? Your revocable living trust is still the top entity and owns your bank accounts, savings, brokerage, and other assets. Between your trust and your various LLCs, we usually put a master LLC of some kind. It is another layer. It owns your various LLCs and creates a layer between those and your personal assets. If something happens in one LLC, you might lose that one, but it does not go farther. If the corporate veil is pierced because formalities were not followed, they will only reach up to that one layer. You are creating a shield between those operations and your personal assets.

Alternative structure: management company model

00:50:01

Francisco Sirvent: Another structure I really like is to have all your LLCs own the real estate individually, but they do not manage the rentals, collect rent, or interface with tenants. They only own the real estate. Then you have a separate entity that is your manager, essentially a property management company. It does not own real estate. It is only the property management company.

00:51:32

Tenants pay rent to the management entity. That entity pays for repairs and bills, finds tenants, vets them, signs leases, and does the management work. The only asset that entity owns is a checking account. Rent comes in and expenses go out. Over time the balance builds up, and on a periodic basis the management company distributes profit to you or to your trust or to another entity. The idea is that the checking account does not build a large balance. It is a flow through account, keeping only a reserve to operate. It is not building up money.

If a problem happens on one of the properties, for example a slip and fall or a drowning in a pool, the owner entity was not responsible for management or maintenance. The management entity was. They will sue the management entity. A lawyer may also sue the ownership entity, but you work to get it dismissed because it had no involvement. The management entity carries the liability. You will have management liability insurance there and umbrella insurance over your other assets. Hopefully that resolves the issue completely. Even if the management entity is bankrupted, it had only a small amount in its checking account. You close it and create a new management company and move on.

Q and A round two

00:54:17

Question: Does blanket liability insurance cover properties and all the LLCs?

Francisco Sirvent: Generally yes, but work with your insurance agent. Show them your structure and make sure things are insured properly.

Question: Can your management LLC contract out management to a property management company?

Francisco Sirvent: Yes. Your management LLC can hire a property management company. If you have a family member who is an agent who does property management, you can hire them. As part of the contract they will agree to indemnify your company for management liability. Just as the owner hires the management company and requires indemnification, you can require the third party to take the management liability.

00:55:22

Question: I assume each LLC needs its own bank account. How does an LLC get a credit card for expenses?

Francisco Sirvent: If the LLCs only own real estate, they do not need bank accounts. They are not receiving money or paying expenses. They simply hold an asset that will hopefully grow in value. If you sell one of these, yes, a check will be made out to that LLC and you will need a bank account then. While you own them and rent them out, they do not need bank accounts. The management company has one bank account to operate all the financials.

To get a credit card for an LLC, go to the bank and apply. Provide what they request. If you have a relationship with the bank, they will usually approve at least a small limit. That card will be tied to the management entity.

00:56:38

Question: If each LLC owns a single rental and not any bank account, what about taxes?

Francisco Sirvent: Generally this structure is disregarded for tax purposes as a pass through. All of the financial activity happens in that one checking account. You do your bookkeeping and end of year reporting on that account, and it usually flows to Schedule E on your personal tax return. Often that is how rental properties are already reported. It will just be a new Schedule E under the name of the management entity. The individual LLCs will have their own depreciation schedules under their names, but the income and expenses pass through to your individual return.

Advanced structure: family limited partnership and irrevocable trust

00:57:41

Francisco Sirvent: Before we run out of time, one more helpful piece. Keeping the structure with the management entity and the ownership entities, you might add a family limited partnership plus an irrevocable trust if you want even more protection.

00:58:57

I really like the structure we covered for multiple pieces of real estate. What changes with an irrevocable trust and a family limited partnership is that the family limited partnership can own many of your individual personal assets and give you some protection around them. You might put your brokerage account, stock you hold, other businesses, a car collection, gold, and significant savings into the family limited partnership.

A family limited partnership has two roles. It has a general partner who is in charge of operations and limited partners who are passive and receive the benefits. We usually set an irrevocable trust as the general partner and your revocable living trust as the limited partner.

01:00:31

It is similar to how the rental side is set up. You have ownership and equity flowing up, but liability, responsibility, and operations on the general partner side. We recommend an irrevocable trust as general partner because it can be set up with very little by way of assets. It is not where the value is built up. It is set up so that your family limited partnership gives management liability to something that is not you as an individual. We do not want you to have management liability. We want to remove you from management responsibility for as many assets as possible. The trust directs actions, and if something happens, that is the entity that gets sued. It does not really own anything. It just maintains a minimal bank account. Money comes in and goes out to the limited partners. Usually you will keep one percent of equity there. If you lose one percent, it is not a big deal.

You might also place the ownership entities under the family limited partnership and even the management entity under it. That is a sophisticated structure because it adds bookkeeping for the partnership and possibly for the trust. Most of us do not do bookkeeping for our personal lives at that level. It must be done professionally and follow generally accepted accounting principles. If you do not invest in proper bookkeeping, these structures can fail in a lawsuit. If the opposing lawyer shows the court that you operated everything as left pocket and right pocket without corporate formalities, the court may allow piercing the corporate veil. Then the structure does not protect you at all.

01:03:29

So while it is more complex, as you build wealth, moving management and control away from you individually is how you build layers and create disincentives for plaintiff lawyers who might otherwise see a big target.

Housekeeping and upcoming sessions

01:04:48

Francisco Sirvent: Two quick housekeeping announcements. On October 24 is my next webinar. That one will not be recorded because I am going to do a practical workshop live with people who want help making decisions about how to set up their will and trust for the first time. It will be very practical. People will ask questions and we will go back and forth, which does not work well on a recording. If you want to sign up, I will post the link here. If you know someone who wants to, please share it.

If something I talked about today sparked curiosity and you think a piece of it might make sense for you, I do free 15 minute phone calls for anyone who attends these webinars. You can schedule a call with me at the link I am posting. Find a time on my calendar, schedule it, and I am happy to jump on that call. We will talk through your situation and I will give you as much information as I can.

Q and A with Jim Piotrowski

01:05:59

Question: What level of wealth would you consider for the irrevocable trust setup?

Francisco Sirvent: Generally three million dollars and up. Some clients with ten million are not interested, but if the cost of the asset protection plan is roughly one half percent to one percent of your wealth, that is where it starts to make sense. Most of the investment is a one time cost, and then you have some fraction of that annually to keep it maintained properly.

Question: What would you expect to spend to set up a manager LLC and five property LLCs?

Francisco Sirvent: For us, these usually start around ten thousand dollars. The last one I did for someone with more than five properties was around sixteen or seventeen thousand because of some nuances. If you want to jump on a call, I can give you a specific quote for your situation.

Jim: I have a question. I understand the homestead protects about four hundred thirty thousand of equity and the rest can go. If you have a second home and a lot more equity in both homes, would you recommend putting the second home into an LLC to protect it from a personal lawsuit? What about your primary residence? If your house has a lot more equity than the four hundred thirty you want to protect, how would you set that up? Does that get clumsy with taxes? Is that the main reason you would not do that, more of a tax issue than protection?

01:08:10

Francisco Sirvent: Yes, tax issues on primary homes are one of the first things to think about when you look at protecting equity beyond the exemption. One of the simplest ways to protect equity in homes is to get the largest line of credit you can from a bank, but do not use it. On the public record it shows the full balance of the line of credit. While that is not a surefire way to protect equity, it is good to have on public record because people who might sue you will see you are leveraged and think there will not be money to collect. It may discourage lawsuits.

There are other ways to protect equity in a primary home, vacation home, or second home through trusts. Some irrevocable trusts can preserve tax exemptions and other tax benefits for primary and secondary homes. Everything has pros and cons. If you want to jump on a call, I can go through those and teach more about them.

Jim: Thank you very much.

Francisco Sirvent: You bet.

Closing and links

01:09:14

Francisco Sirvent: Any other questions? If not, in the chat are links for the next workshop on October 24. If you know anyone who needs to set up a will or a trust, please send that to them, even families that are young and starting out who need to name guardians, agents for powers of attorney, beneficiaries, and trustees. I will walk through how to make those decisions. There will be a worksheet so they can take notes and think through everything.

Also, schedule a call with me. No cost, no catch. Just a quick conversation to see if today sparked an interest in what we talked about. I am happy to dive into it one on one.

That is all the time we have for today. Thank you for coming, everybody. I hope this was helpful. Jump over to our YouTube channel and look at our other topics, or watch the replay for this one. It takes us about a week to get these up, and you can catch this again. Thanks, everyone.